Key takeaways
- Over the past 10 years, inflation has averaged 1.88%.
- 2022 showed an annual inflation rate of 8%.
- The U.S. experienced deflation in the 1930s and high rates of inflation in the 1970s and early 1980s.
The U.S. is currently experiencing higher-than-usual inflation. Given the extremely low inflation experienced over the past 10 years, the current inflation rate has shocked many consumers. Some have been forced to cut back on spending to afford basic living essentials. Here is a look at the history of inflation and the times when the U.S. experienced unprecedented inflation and deflation.
What is inflation?
The simplest way to describe inflation is that it increases the price of goods over time. Conversely, it's also the decline of purchasing power over the same period. For example, if a pack of gum costs $1 today and the inflation rate is 5% annually, next year, the gum will cost $1.05. The price of the item went up, and the purchasing power of your dollar went down.
Inflation is the opposite of deflation, where prices decrease and purchasing power increases. The amount of inflation is measured by the Consumer Price Index (CPI), which averages the prices of a basket of goods and services.
The CPI tends to increase gradually over time and is usually tolerated by consumers. This is because inflation also signifies a healthy, growing economy. When inflation has a sudden spike, it becomes noticeable and painful for consumers’ wallets. When inflation quickly rises, consumers find that their income can't stretch as far as it once did. They have to make sacrifices when purchasing necessary household goods and services to compensate for the increased prices.
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Last 10 years of inflation
Looking at the last 10 years of inflation provides a picture of how inflation has affected the cost of the CPI.
- 2012: 2.1%
- 2013: 1.5%
- 2014: 1.6%
- 2015: 0.1%
- 2016: 1.3%
- 2017: 2.1%
- 2018: 2.4%
- 2019: 1.8%
- 2020: 1.2%
- 2021: 4.7%
Inflation has been relatively low and sometimes flat for the past 10 years. In some years, spikes in prices for goods, such as fuel, underwent wild fluctuations that affected the overall inflation rate but left prices for other goods and services stable. Periods of low to no inflation result in overall price stability and make it easy for consumers to keep up with the cost of daily living.
Low inflation also helps businesses to grow as the Federal Reserve is likely to keep interest rates low. This means businesses can borrow money cheaply to help fuel their growth. Likewise, consumers can also borrow money at low cost, allowing them to make significant purchases like homes and automobiles.
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In 2021 and 2022, multiple factors around the globe caused inflation to spike sharply, making it more difficult for consumers to buy goods beyond the basics of living. However, some signs point to inflation easing at the end of 2022, and some goods and services saw prices beginning to ease.
At the time of this writing, the annual inflation rate for 2022 is 8.1%. This number could be revised as adjustments are made to recent economic reports. However, inflation will likely end up at around 8% for the year.
Average annual inflation rate
The average annual inflation rate fluctuates over time and through different time periods. For the 10 years between 2012 and 2021, the average inflation rate was 1.88%. For a more extended lookback period, between 1960 to 2021, the average inflation rate was 3.69% annually. The Federal Reserve's goal is to keep inflation between 2-3% annually.
Extreme examples of inflationary times
While the last 10 years have seen below-average inflation rates, the 20th century has seen periods of extreme inflation and deflation, including the Great Depression that began in 1929 and the Great Inflation that began in the mid-1960s and didn't break until the mid-1980s. Both had different causes but were equally devastating to the U.S. economy.
The Great Depression
The Great Depression began in late 1929 and lasted for 10 years, ending in 1939. The Depression, as it's more colloquially known, was the result of money pouring into the stock market and overinflating the price of stock shares. The economy had been slowing over the summer before the stock market crash, but it wasn't until Oct. 29, 1929, that stocks lost most of their value and wiped out traders and investors alike. Consumers stopped buying, factories stopped producing and people lost their jobs.
The result was extreme deflation. In 1930, prices fell 2.3%. In 1931 and 1932, prices fell by 9% and 9.9%, respectively. Prices fell another 5.1% in 1933 before the trend finally reversed. On the surface, falling prices might sound ideal as consumers can purchase more goods with their money. However, deflation, as seen in the 1930s, is dangerous.
Because people believe prices will continue to fall, they stop spending and wait for a lower price. As prices fall, businesses see their profit margins shrink or disappear. They halt production and start laying off workers. This results in less demand, pushing prices even lower.
The U.S. economy went through periods of recovery and recession during the next 10 years as the government worked to create solutions to the problems. Then World War II began, and the U.S. economy recovered due to wartime production efforts and the rebuilding of Europe.
The Great Inflation
After the U.S. economy recovered from the Depression, it went through a period of expansion until 1964. In 1964, the Federal Reserve instituted a policy of maximum growth in the money supply and the desire to reach full employment in the aftermath of the Great Depression. From 1952 through 1964, the annual inflation rate hovered around 1.3%, then it began to spike. By 1966, the inflation rate was 2.9% and 3.1% in 1967.
Multiple factors caused the Great Inflation to affect consumers and manufacturers throughout the 20 years. The economy suffered spikes in inflation and accompanying recessions as prices for goods fluctuated wildly. The early 1970s saw the oil embargo, which caused oil prices to increase sharply and add to inflation. The Federal Reserve aggressively raised interest rates in 1979 to combat inflation. For perspective on how high the rates got during the Great Inflation, consumers were paying an average of 18.5% interest by 1981.
How long to expect high inflation
It's difficult to predict how long inflation will last as prices for goods slow at different rates. The spike in gas prices during early 2022 has receded and is trending lower. As gas prices return to lower prices, so does the cost of transporting goods to the store, which also helps bring prices down. In the meantime, avian flu caused the culling of millions of chickens, resulting in a sharp increase in the cost of meat and eggs.
These issues alone create temporary pain in one sector of the economy. When combined with other inflationary pressures, they extend the period of high inflation. Economists currently feel that inflation will stick around throughout most of 2023 and expect prices to finally return to normal by 2024.
The bottom line
Inflation is a normal part of the economic cycle, but very high or negative inflation rates are bad for an economy. Over the past 10 years, the U.S. has experienced lower-than-usual inflation. But inflation is now much higher than usual due to the pandemic and its various impacts on the world economy. The Federal Reserve is working hard to ease inflation, which should return to normal levels in time.
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